The old saying “you have to spend money in order to make money” is true. Growth requires capital and, for many small businesses, this extra cash will come as debt.
You’re not the only one who shudders at the thought of borrowing money to fund growth. Many small business owners are afraid of debt and only seek it when their businesses are in desperate need.
This is part of the problem. Your perspective of debt may be negative if you have only experienced debt in an emergency.
The majority of business owners only borrow money in the worst-case scenario
Meet Kelly, the owner of Kelly’s Creations.
Kelly has been running a small company that produces salad dressings and condiments for the past 10 years. Kelly is proud of her financial responsibility. Kelly had a mountain of debt in her early 20s. She had to sacrifice new purchases and pinch pennies for years before she was able to pay off her debt.
She pays in cash for everything, in both her business and personal life.
Kelly receives a large order from a client that she cannot fulfill with the materials budget she has set up. This is a great opportunity for Kelly’s company, but it will require funding. Kelly believes she is a sure thing to get a small-business loan. She has never missed a vendor payment and she keeps a small amount of cash in reserve.
Kelly’s credit history is non-existent. The bank cannot guarantee that she will repay the loan because she has never borrowed. She was denied the loan.
Kelly is in a pickle.
Debt is not always bad
Kelly discovered that sometimes debt is needed to achieve your goals. This is true to some extent because we all take out a loan or mortgage to purchase a house, or even a car. These forms of debt are accepted as a necessity. Many small business owners view all debt as bad when it comes business.
Not all debts are created equal. Good debt helps you grow. Bad debt weighs you down. What is the difference between bad debt and good debt?
You’re welcome.
Some people have a preconceived notion of what is considered “good debt”, and “bad debt”.
* Merchant
* credit
*Pay
*Auto
Have Both It
We How much debt is enough? It depends on the cash flow, your business’s growth plans and the type of debt. Keep an eye on the total debt of your business, and especially how it compares with your income.
You have a CPA right?
You are responsible for the fate of your debt
Do you worry about Kelly? Don’t be. She has found the funding that she needs and opened credit lines with some of her suppliers. She also hired a CPA who will help her create financial strategies to grow her business. She pays cash for the majority of her purchases.
Debt isn’t a bad thing. When used correctly, it can help you reach your goals and open up new doors for your business.